Sanmina-SCI's current development is negatively influenced by the high concentration rate of its customer base. For example, HP and IBM accounted for about 38.8% of the company's revenue in 2003, which increased to 40.4% in 2004. Although the majority of EMS providers have the same problem, there is no other company whose two main customers account for more than 40% of revenue.
Moreover, both IBM and HP are mainly active in the PC industry. Particularly in the desktop PC industry, product specifications have a high degree of standardization, and technology used is not very advanced. Focus in this industry has thus slowly shifted from innovation-based competition to cost-based competition. This means that EMS providers have not only seen competition between themselves increase, but are seeing more competition from Taiwanese ODM companies.
These aforementioned factors have meant that Sanmina-SCI's profits have been less then ideal in the past few years, as the company's operations carry a higher level of risk than other EMS providers due to the concentration of resources toward only a few customers. Companies such as Foxconn and Jabil serve industries with far lower concentration and have therefore seen stable profit performances.
In order to escape from its less than ideal position, the company has two options: it can try to stay in its current industries and manufacture more products with higher levels of technology, or it can go into industries which have been neglected by other EMS providers.
Looking at the first possible strategy, products with high technology specs oftentimes bring high profit rates for manufacturers, and as the production process is quite complicated and often has to be changed, major brands are likely to give orders to EMS providers with economies of scale and with the needed know-how. After Sanmina-SCI's acquisition of Newisys in 2003, its main target market became enterprise computing systems. If Sanmina-SCI is able to increase its R&D and design capabilities, its chances to obtain major brands' orders for high-profit products such as servers will be greatly improved.
The second strategy is aimed at avoiding the fierce competition in the PC industry. The result of many EMS providers in one industry is that they all start to increase their production capacities, causing a situation of oversupply, which in turn leads to falling prices and lower profit margins. Therefore, Sanmina-SCI might consider moving into industries where not as many EMS providers are currently active, such as medical systems, semiconductors, automobiles, defense, and avionics products. The company put this strategy into practice by recently acquiring an Israeli medical systems design company. Another good example of this strategy is provided by Jabil, which used to be heavily involved in the telecommunications industry, but lately has been expanding its operations to include consumer electronics products (20% share of Jabil's revenue), medical systems (12%), and automotive products (8%).